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Launch of finance laws is anything but child’s play

IF THE launch of euro banknotes and coins can be compared to the birth of a baby, the preparation of a pan-EU financial services framework to match the fledgling currency is the equivalent of decorating the nursery.

But while the new banknotes and coins will certainly be delivered on time on 1 January, many of the accompanying reforms to the EU’s laws, inspired in part by the euro launch, will certainly not be ready. The ‘parents’ of the financial services overhaul are still quibbling about the whats, hows and wherefores.

To stretch the nursery metaphor: what colour paint to choose, who gets to apply it, and how.

Given the complexity of the task in hand, and the vested interests involved, it’s not surprising that the debate has become so animated. The timeline for all of these reforms is not pegged directly to euro, but instead to the Financial Services Action Plan unveiled in May 1999.

The forty measures, from binding regulations to voluntary codes of conduct, cover the entire financial services field from securities and banking to insurance, and from financial institutions to retail customers. The onus is on harmonisation of rules – eradicating differences that could hamper trade in the single market and on country-of-origin control – where companies operating legally in their home market can use a financial services ‘passport’ to ply their trade elsewhere in the Union. The European Council summits at Lisbon and Stockholm set a 2005 deadline for the final implementation of the action plan, and 2003 for the integration of securities markets.

To date, member states have rubber stamped crucial laws on distance selling of financial services; mutual funds and a regulation paving the way for the use of international accounting standards instead of potentially conflicting national norms. But differences of opinion remain over how much scope member states such as France should have in imposing domestic consumer protection rules on foreign firms and this has slowed down the introduction of new laws.

Even more controversial has been the way the European Commission has tackled securities market rules. Given their complexity and the need for speed, it was decided that two committees – one of national regulators and the other, a ‘securities committee’ of member states and the Commission – would tackle the fine details of the rules.

But since then a row has broke out between the European Parliament, Commission and Council of Ministers over MEPs’ right to oversee this fine-tuning process. The architect of the changes, former Belgian central banker Baron Alexandre Lamfalussy, has expressed fears that the Commission has failed to consult industry widely enough on the two directives – on prospectuses and market abuse – that have already been launched using the new approach.

He said this was a “worrying sign” which showed the Commission had not learned from its “old habit of simply showing market users their drafts”. Lamfalussy is also concerned that powerful member states, notably Germany, could have excessive leverage over the new system.

British MEP Chris Huhne ruffled Commission feathers when he recently argued there should be a “sunset clause where the powers of the securities committee would be removed after four years”, boosting Parliament’s leverage. Although MEPs and the Commission will argue themselves blue in the face, a deal will surely ensue – and the new laws will eventually hit the statute books.

In the meantime, the signs are that the Commission has also learned its lesson after being rapped on the knuckles for its prospectuses and market abuse drafts.

The rules on prospectuses are under fire for burying small firms and second-tier ‘small cap’ stock exchanges in the same red tape currently reserved for blue-chip multinationals.

On market abuse, the many European stock exchanges that police their own markets fear they would lose this role to a single regulatory authority a step removed from the ‘crime’.

In public, Commission officials deny that they have actively invited industry to table new versions of the legislation on prospectuses. But that’s not how the London Stock Exchange, one of the fiercest critics of the directive, tells it.

Soon after it became apparent that the flak would fly over these laws, David Wright’s financial markets department at the Commission launched a huge second round of consultations on next year’s planned update to the investment services directive, seen by many as the cornerstone of the entire financial services rule book.

Ironically, the most radical reforms may not be led in Brussels at all but in the Swiss financial centre of Basle. Though firmly embedded in the financial services action plan, it is the ‘Basle Committee’ of international financiers which is driving far-reaching changes to the capital requirements for banks and investment firms – intended to be in place by 2005. The new rules – which must be incorporated in a new EU directive – are designed to change the amounts of capital kept in reserve to cover bad debts, reflecting an evolution in the tools industry has at its disposal to measure the risk of loans.

But fears are emerging that the new rules could lead to a credit squeeze on small firms hit by far higher funding costs than ‘AAA-rated’ corporations. Financial Services Commissioner Frits Bolkestein said policy makers would not ignore the plight of small and medium-sized enterprises (SMEs) when a consultation on the issue takes place early next year. And while the EU has done its best to plan ahead for the financial future, no one can legislate for all events. The 11 September attacks and the chain of retaliation and bio-terrorism that ensued have already forced a rethink of the changes needed to how the flow of money, in all of its forms, is regulated.

Money-laundering and the question of whether terrorists used information of impending attacks to make huge sums on international markets have soared up the agenda. “In the present unstable international political and economic climate, implementation of the financial services action plan appears more prudent than ever,” said Bolkestein recently. “Efficient financial markets underpinned by robust prudential supervision will help the EU become a pole of stability capable of responding to external shocks.”

Bolkestein hopes a top-level review of the process at next year’s Barcelona summit will ensure it’s a pole that remains upright.